• Oil prices have rallied back towards $50 per barrel, retracing the steep losses in June.

• But upside potential is limited, and in fact, oil prices are under pressure because of waning OPEC compliance.

• OPEC production rose in June and July, putting the group’s output at its highest level so far this year. Iraq and the UAE have routinely overproduced, while Saudi Arabia has also boosted output to meet higher summer demand. Rising production from exempted countries Libya and Nigeria are overwhelming some of OPEC’s cuts.

• Total production from the cartel stands somewhere around 32.9 million barrels per day, according to SEB, almost 1 mb/d above its low point from earlier this year.

Market Movers

• Energy Transfer Partners (NYSE: ETP) says that sabotage or an accident might have caused the spill of diesel and drilling fluid into an Ohio wetland, which led to regulators halting construction on the $4.2 billion Rover natural gas pipeline.

• Saudi Aramco is considering a $2 billion investment in a Chinese state-owned refinery, giving Aramco a 30 percent stake in PetroChina’s 260,000 bpd facility. The move would be consistent with Aramco’s strategy of locking in demand for its crude by acquiring stakes in overseas refineries.

• BP (NYSE: BP) was upgraded to “Overweight” from “Neutral” by Piper Jaffray, because BP is in the early stages of “multi-year positive inflection” after putting the costs of the 2010 Deepwater Horizon disaster behind it. Piper Jaffray gave BP a $42 per share price target, up from $38.

Tuesday August 8, 2017

Oil prices faltered on Monday on concerns about slipping OPEC compliance, as well as news that a disruption in Libya had ended. "The petroleum markets are tipping toward the lower end of their recent trading range as oil producers meeting in Abu Dhabi have been slow to assure the market that compliance with this years production cuts will be improved,” Tim Evans, Citi Futures’ energy futures specialist, wrote in a research note. News that Saudi Arabia would cut oil exports (see below) helped steady crude benchmarks on Tuesday.

Morgan Stanley: “Signs of tightness showing up in certain pockets.” In a new report, investment bank Morgan Stanley pointed to tightening signs for certain crude oil blends, including the Urals blend and oil from Angola. The market is showing some optimism, and narrowing differentials for other benchmarks against Brent offer some evidence about tightening conditions. At the same time, Morgan Stanley noted that U.S. shale companies tend to hedge their production at $50 per barrel, which could provide resistance for further price gains.

$50 oil brings U.S. shale back. In addition to Morgan Stanley, other analysts agree that $50 is a key threshold that starts to trigger new output from U.S. shale. More fields are profitable, drillers are more likely to move ahead with new projects, and crucially, they can hedge at that level. “I do think $50 is the line of demarcation,” Rob Thummel, managing director for Tortoise Capital Advisors, told the WSJ. “With oil below $50, producers in general are indicating that if we stay here at this price, we’re going to have to reassess capital and not spend as much, so production won’t be as high.”

Saudi Arabia cuts oil exports to Asia. In an effort to accelerate the market balancing, Saudi Aramco is expected to cut oil sales to South Asia and Southeast Asia in September. Aramco’s cuts across the globe could reach as high as 520,000 bpd.

International oil companies pull out personnel from Venezuela as crisis deepens. Repsol (BME: REP) withdrew all of its foreign workers from Venezuela as the country continues to fall apart, and Chevron (NYSE: CVX), Statoil (NYSE: STO) and Total (NYSE: TOT) pulled smaller numbers of people out. The effect on the country’s oil production is unclear at the moment. Meanwhile, the U.S. is expected to slap sanctions on more individuals in the Venezuelan government, freezing the assets of 10 to 20 people close to the President.

Disruption eases at Libya oil field. Libya’s largest oil field, the Sharara, saw production interrupted by protests, but the National Oil Company said that it restored output after several hours. The 275,000 bpd is supposedly back online, however, the NOC did not say if the field was producing at full capacity.

Norway oil production to enter decline by 2025. Bloomberg reported that Norway’s Lofoten islands will probably remain off limits for exploration, keeping what the industry believes are billions of barrels of crude oil reserves in the ground. The end result could mean that Norway’s oil production starts to decline by 2025, as depleted fields are not replaced. Norway’s output is already down 12 percent from the 2004 peak, but production has stabilized. However, a failure to find and develop new fields will mean the country sees output begin to fall apart by the middle of the next decade.

Barclays: Oil to see a “downward correction” this quarter. Investment bank Barclays sees Brent crude prices falling in the third quarter, although the benchmark will then rebound at the end of the year. "Prices have moved higher, due to a perfect combination of a favorable macro environment, a seasonal uptick in consumption, continued inventory drawdowns, and geopolitical unrest," Barclays wrote in a research note. "Certain factors that supported prices in July are unlikely to last, and we expect a downward correction during this quarter."

BP may have discovered new shale gas source in New Mexico. BP (NYSE: BP) said that one of its shale gas wells in the Mancos Shale in New Mexico reached the highest production rate in 14 years – 12.9 million cubic feet of natural gas per day in the initial 30-day period. That exceeds the 8 to 12 mmcf/d seen in the Eagle Ford, for example. "This result supports our strategic view that significant resource potential exists in the San Juan Basin, and gives us confidence to pursue additional development of the Mancos Shale," said Dave Lawler, head of BP’s shale gas unit, according to the Houston Chronicle.

U.S. pipeline regulator finally gets back to business. The Trump administration is responsible for a backlog of oil and gas pipelines due to its insufficient and sluggish pace of filling vacancies at the powerful Federal Energy Regulatory Commission (FERC), which oversees the approval of pipelines across state lines. FERC needs three commissioners to have a quorum, and since February the agency has only had one, which meant that no approvals could be issued. That led to a backlog of around $13 billion worth of proposed pipelines. Last week, just before the U.S. Senate went on a month-long recess, they finally approved the necessary nominees.

Kosmos Energy to drill off West Africa. Kosmos Energy (NYSE: KOS) said it would begin drilling the so-called super-giant gas fields off the coast of Senegal and Mauritania this month. Kosmos has been behind some of the largest discoveries in the region in recent years. "Mauritania-Senegal is the largest new petroleum system opened along the last 15 years along the Atlantic margin," Andy Inglis, chairman and CEO of Kosmos, told investors.

By Tom Kool for Oilprice.com